Abstract
Some countries spend a relatively large percentage of GDP on their militaries in order to preserve or secure their status as global powers. Others do so because they are ruled by military governments or aggressive regimes that pose a military threat to their neighbors or their own populations. It is debatable whether there is a causal relationship between military spending and economic growth in the economy. It is again a policy debate how much to allocate funds for civilian and how much for military expenditure. Under these puzzling results of the impact of military expenditure on economic growth which is frequently found to be non-significant or negative, yet most countries spend a large fraction of their GDP on defense and the military. The chapter tries to investigate the relationship between military spending and economic growth in India. It also sees whether external threats, corruption, and other relevant controls have any causal effect. This chapter obtains that additional expenditure on Indian military in the presence of additional threat is significantly detrimental to growth implying that India cannot afford to fight or demonstrate power at the cost of its development.
TopLiterature Freview
The extant of some relevant literatures should be mentioned here to proceed for our present study. Benoit (1973; 1978) in her statistical findings and studies showed that, military expenditure enhances economic growth in most of the developing countries. This result was reinforced and reestablished later by many other studies (Lim, 1983; Grobar & Porter, 1989). To illustrate, Emile Benoit’s interpretation of his ‘chief regression results involved some startling statistical reasoning, including the notion that the portion of R2 not accounted for by the regression variables can be discounted when assessing the statistical significance of a particular variable which is a convenient way of magnifying t-statistics.
Benoit’s study stimulated many other economists for further thinking and empirical work on this subject. Broadly speaking, those studies suggest that it is largely inconclusive as some studies find no significant relation between military expenditure and economic growth; others find a negative relation and others still a positive one. On closer examination, however, evidence shows that military expenditure reduces economic growth.
The research question that most studies start with is that whether a high ‘military burden’ (that is military expenditure as a ratio to GDP) tends to lower economic growth in developing countries or not. There is a common answer that military expenditure promotes growth by stimulating aggregate demand and reducing excess capacity but this answer may be misleading because lack of demand is not a major constraint on medium-term growth in most developing countries. Even where demand needs to be stimulated, there is no reason to do it by building missiles rather than roads or schools. What is required is an evaluation of the opportunity cost of the military burden by considering the next best use of public resources other than military expenditure. The question then arises whether to reduce military expenditure and divert funds to other public expenditure or reduce total public expenditure as such.
Key Terms in this Chapter
Intensity of Threats: Impact of the external threat measured by some specific index.
Economic Growth: Increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms.
Military Spending: Public expenditure incurred on defense and non-civilian affairs.
Causality: Causality (also referred to as causation, or cause and effect) is the agency or efficacy that connects one process (the cause) with another process or state (the effect), where the first is understood to be partly responsible for the second, and the second is dependent on the first.
Statistical Significance: Statistical significance means that a result from testing or experimenting is not likely to occur randomly or by chance, but is instead likely to be attributable to a specific cause.
External Threats: External threats are actions and positions against our national security which is a state or condition where our most cherished values and beliefs, our democratic way of life, our institutions of governance and our unity, welfare, and wellbeing as a nation and people are permanently protected and continuously enhanced.
Public Expenditure: The expenditure incurred by public authorities like central, state, and local governments to satisfy the collective social wants of the people.